Russian Arms Sellers Exude Optimism

06/05/2011by Richard Weitz

Some of our most remarkable discussions during the May 25-27 session of the Valdai International Discussion Club in Moscow were with senior military and civilian officials in Russia’s defense community. These occurred under “Chatham House Rules,” which allows us to use the information without attributing it directly to the speaker.

One such dialogue might particularly interest Second Line of Defense readers. On Tuesday, May 25, we had dinner with the head of one of Russia’s main defense corporations. He shared with us his insights on a number of issues, including Russian perspectives on future sales opportunities at home and abroad.

The fall in Russian arms sales to China in the past few years has led many Western defense analysts to believe that Russian arms dealers have essentially given up on the Chinese. Since Russia and China signed a military-technical cooperation agreement in December 1992, the People’s Liberation Army (PLA) has purchased more than 90 percent of its defense imports from Russian firms. During the 1990s, the value of these deliveries peaked at about one billion dollars annually. During the mid-2000s, this yearly figure has sometimes been twice as much. Between 1992 and 2006, the total value of Russian arms exports to China amounted to approximately $26 billion, or almost half of all the weapons sold abroad by Russian firms (more than $58 billion during that period).

In recent years, this situation has clearly changed. The growing sophistication of China’s defense industry now enables the PLA to buy Chinese-made systems rather than import Russian-manufactured ones. With the PRC government’s encouragement, Chinese defense firms have been exploiting the opportunities for licensed production in order to learn how to manufacture substitute products that, while perhaps not as good as the most advanced Russian weapons, would be still on par with those produced during the late Soviet period. PRC manufacturers are producing either more indigenous advanced weapons systems or more defense technologies, sub-systems, and other essential components that Chinese firms can insert directly into foreign-made systems. The Chinese have also objected to the quality of some of the weapons they imported from Russia in addition to poor post-sale servicing of the imported systems. Furthermore, PRC representatives have also complained about how Russian production difficulties have resulted in lengthy delays in the fulfillment of Sino-Russian defense contracts. For their part, Russian and foreign experts suspect that the Chinese have reversed engineered some of the imported Russian military technology.

Since 2005, the PRC has stopped purchasing Russian warships and warplanes and has ceased signing new multi-billion arms sale contracts. The director of Russia’s state-controlled arms export company, Rosoboronexport, recently forecast that the value of Russian arms sold to China could decline to as low a level as 10 percent of the value of all Russian military exports in the coming years. Some experts believe that figure could fall even lower.

But the defense company head we had dinner with insisted that Russian firms still see opportunities for additional lucrative weapons sales to China. Although he recognized that Russia helped contribute to the improved quality of the PRC defense industry through its license transfer of Su-27 technologies and other means, he still saw future opportunities for profitable collaboration with the Chinese. According to him, such collaboration is possible since most representatives of the Chinese aerospace industry recognize that China’s defense sector is still lagging and therefore needs to rely on foreign partners.

When I asked about the PLA’s recently unveiled “5th-generation fighter,” this defense company leader responded that the Chinese have a long way to go before they will produce a genuine “5th-generation” plane equivalent to the Russian Tu-50. He explained that although some of the subsystems of China’s J-20 might be considered 5th-generation, the Chinese still need much more time to combine all these subsystems effectively and produce a genuine state-of-the-art 5th-generation craft.

Conversely, the defense company president also expressed some irritation at the Indians for forgetting that it was Russia, rather than India, who was the leading partner in their defense relationship. He added that, despite the decision of the Indian defense ministry to eliminate Russian (and U.S.) planes from their latest round of competition to sell India its next multi-role fighter, he still considered the country a good sales market as long as New Delhi realized that the process was a two-way street and that Russia had useful things to offer.

In terms of Russia’s own weapons purchases, the business executive expressed his approval for the Russian government’s newly adopted State Armament Program (SAP) 2011-2020, which seeks to increase the large-scale acquisition and procurement of modern military equipment. The SAP envisages raising the proportion of modern weaponry in service with the Russian military from approximately 15 percent today to 30 percent by 2015, and to 70 percent (up to 100 percent for some types of weapons) by 2020. The Ministry of Defense (MOD) priority procurement areas will be strategic nuclear forces, high-precision conventional weapons, and Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) systems.

Under the SAP, military research and development spending will decrease considerably from current levels of approximately 20 percent to 10 percent of overall spending, while 80 percent of the MOD SAP will now go to purchasing new weapons, with the remaining 10 percent paying for repairs and upgrades of existing equipment. A senior Russian general we met later said that the Russian military has adopted a long-term perspective toward its R&D efforts. The MOD is willing to wait many years before some funded projects yield results.

The defense company head we met with considered the SAP to be well-balanced between what the Russian arms industry could efficiently produce (in terms of economies of scale) and what the Russian military can absorb (in terms of training adequate personnel and paying for the systems’ acquisition and upkeep). Russia’s defense industry could produce many more weapons systems, but the Russian Armed Forces would be incapable of incorporating all of them. The SAP is also sufficiently large as to place the Russian defense companies in a good position to produce more after 2020, when Russian government defense procurement is expected to increase further. He also praised the MOD for adopting a more effective practice of servicing their systems in partnership with Russian firms rather than, as was done previously, trying to do everything in-house.

In contrast, he argued that Russian defense companies saw few good commercial opportunities in many former Soviet republics. Their defense budgets are so small that they can only afford to buy a few modern systems. Many of these purchases are discounted or subsidized by the Russian government as a means of bolstering the regional security ties. The CEO, however, acknowledged that Russian firms do have opportunities to service and upgrade these countries’ existing Soviet-origin weapons. In the case of modern aircraft, such servicing and upgrades can be very lucrative. But some of these states, such as Kazakhstan, have pursued what he considered the mistaken policy of having firms from Belarus service their warplanes simply to save money despite the inferior quality of work.

But this official did see good global sales prospects for the Sukhoi T-50 (PKA FA), including those in Southeast Asia, Latin America, and even a few African countries. The Russian Air Force will also continue to purchase these planes through at least the current SAP (2020), and probably beyond, while the Indian Air Force will begin buying the planes around 2015. He also believes that the Russian aircraft industry would further develop the Su-30/34/35 series, which he argued was completely different from the Su-27 sequence. He also stated that these 4th-generation planes would experience strong sales due to the Sukhoi’s commitment to produce 5th-generation craft. Buyers appreciate the company’s commitment to remain a leading developer of aerospace technology and could see how 5th-generation technology could be backfilled into their 4th-generation planes, as Sukhoi was doing in the Russian Air Force.

Finally, he confirmed that Russian arms sellers did not consider European military aircraft manufacturers as major competitive threats. Although their planes were often of very high quality, they were typically very expensive due to limited production runs (resulting from the small size of the European domestic markets) and to high European labor and manufacturing costs. (The fact that Eurofighter and Dassault have made it to the final round of the Indian multi-role fighter competition, while the Russian entry did not, presumably explains his critical remarks about the Indians not appreciating that their defense relationship with Russia must be a two-way street.)

In our May 27 meeting in the Ministry of Defense, a high-ranking officer confirmed Russia’s willingness to import some foreign weapons systems if the domestic manufacturers lack the capacity to produce items efficiently. Nonetheless, Russian policymakers are aware that purchasing sophisticated foreign weapons is a difficult and expensive path, so it will only be done on a limited basis.